Allowance cut to impact saver confidence

Autumn statement 2012: The reduction in the annual and lifetime pension allowance contributions could impact on more savers than the 2% it is aimed at.

The Chancellor George Osborne announced that from 2014-15 the annual allowances will reduce from £50,000 to £40,000 and the lifetime allowance will be reduced from £1.5 million to £1.25 million.

In the Autumn Statement he said that the measure will affect the top 2% of savers approaching retirement as 98% of savers have a pension pot worth less than £1.25 million.

However, Liam Mayne, senior pension consultant at Aon Hewitt cautioned that previously the annual allowance was targeted at those paying additional tax rates. But with the annual reduction down to £40,000 it brings into scope those paying 40% tax.

He added that the lifetime allowance could also become an issue for savers when they near retirement if they experience decent investment returns on a pension pot. This could casue them to exceed the lifetime allowance.

Mayne added that government changes to allowances also impacts on savers’ confidence in pension schemes.

“I think it undermines the stability of the pension system. We had a change in 2006, 2009, 2010 and 2012. The government has shown no commitment to a stable pension tax system so if you are a saver who is able to save a decent amount you are going to wonder if pension schemes are a good place to save your money. Particularly with the lifetime allowance coming down from £1.8 million to £1.25 million in nearly three years, that’s nearly a 33% drop.”